Wow, what a first day back in the office!
I’d hardly had time to boot up my computer for the first time in the week and the FTSE was flashing red. Looks like I missed some decent action last week as well with the bail out of Fannie Mae and Freddie Mac.
Lots to talk about, it’s hard to know where to start!
Let’s start with the pleasantries…
The turbulent market action seems a world away from the wonderful week I enjoyed in Lake Como. We didn’t get off to a good start with the weather and it looked as though my bad weather curse was striking again. The skies were almost as dark as the looks I was getting from Mrs Market Maven (almost).
My track record isn’t great. Majorca: worst floods in ten years. India: worst pre monsoon rains in decades. Three ski trips: no fresh powder and lots of slush. Thankfully, my bad luck broke after an almighty thunderstorm on Sunday and the skies were blue for the rest of the week. Lake Como is a great place to visit and we enjoyed some fantastic treks up the mountains with wonderful views of the lake and the pre alps. If you’re ever in the region I’d recommend the lovely family run Hotel Villa Marie in Tremezzo.
It was a great switch off, but I did keep abreast of affairs on financial markets with the CNBC in our room. Not least because we’d flew with Bankrupt Alitalia and I wanted to check we could still get home! It was rather alarming to find out that it only had enough fuel provisions until the Monday. Thankfully we flew back on the Saturday!
So, onto the crash and how it might affect your trading – what strategies can you employ to overcome it?
Trading strategies to deal with the crash
Impressive as it was, yesterday’s crash wasn’t the worst the markets have ever seen (despite what you may have read on the front of some alarmist papers). According to last year’s Stock Traders Almanac, the 20 worst days in the history of the FTSE100 are as follows (since 1984):
20 Oct 1987: -12.2%
26 Oct 1987: -6.2%
19 Oct 1987: -5.7%
22 Oct 1987: -5.7%
21 Jan 2008: -5.5%
15 July 2002: -5.4%
16 Oct: 1987: -5.4%
22 July 2002: -4.9%
12 Mar 2003: -4.8%
01 Aug 2002: -4.8%
Yesterday’s 3.9% was joint 20th in the list of all time worst days for the FTSE. 1987 was a particularly special case as the FTSE closed then the sell off continued on Wall Street. If you take the 19th and 20th together you get a combined fall of 17.9%.
On the 19th October 1987, the Dow Jones fell a whopping 22.61% in just one day. That’s nearly a quarter of the stock market’s value!
What happened next?
The FTSE 100 index took just under two years to recover its pre-Black Monday position. Had you bought at the close on October 20th you would now be sitting on a gain of 285% excluding dividends which would have pushed your return up to around 350-400%.
Where does that leave us?
Hopefully not too bad if we’re focusing on short term trades. The US government have taken to making announcements over the weekend so Mondays have been treacherous of late. If you have any trades open on a Friday, be extra careful.
More than anything I think yesterday’s crash shows the value of trading, at the very least so you feel you have some control when major events such as this happen. Provided we’ve found ourselves a reasonable edge through a system or from our own methods and keep our emotions in check, we’re on the right path. However, this is hard to do if we’re thinking about how much we’ve just lost in our savings with yesterday’s crash.
How to trade with a clear head while everyone else is losing theirs.
I read something a while back that really struck home with me. It was an article about the importance of making sure we have our personal finances sorted so these issues do not interfere with our trading. Finding the right trading system is only half the battle, in fact it’s probably less than that. By far the hardest part of trading is dealing with all the emotional ups and downs of trading with real money. When to pull the trigger and when to hold off are tricky decisions with money on the line. Even with a completely mechanical system our little demons get in the way a lot of the time. For example after a bad run, you might be quick to change your methods or money management only for your original method to recovery and for you to lose out.
If your personal finances are not straight, it is going to be very difficult to trade with a clear head. If you’re trading with borrowed money, worrying about paying the mortgage or thinking about how much your saving pot lost in yesterday’s crash, it’s very hard to trade with a clear mind. We might chase losses more or snatch at gains too quickly because of other things on our mind.
I’ve been there when I first started trading, I jumped in with too much too quickly and it was terrible for my trading. I ignored all the risks went in with a big lump that I had a big emotional attachment too. This meant was trading like an idiot because I was scared of losing money. Not wanting to lose money is fine, we all have to be like that, but I was letting my emotions get the better of me.
It’s an area often overlooked, but getting your personal finances in order so that you can trade with a clear head can be just as important as finding a killer system, if not more so. Unfortunately as Lehman brother has shown, you can have all the fancy systems in the world, but they are all operated by humans and lets face it, we can be pretty dumb when it comes to money.
Avoiding the crash and trading through it
One way to keep a clear head and trade what’s in front of you is to keep your savings water tight, allowing you to speculate with your trading pot. I’m not a qualified IFA, so the following is just an idea and may not be appropriate for you.
I know long term investing doesn’t interest all of you, so I’ll keep this brief. Many pension managers and ISA salesmen push managed funds despite the fact they often underperform index trackers. As we’ve seen, the stock markets themselves have hardly been a one way ticket to riches over the last few years.
One book on investing that I’d thoroughly recommend is “Worry Free Investing” by Zvi Bodie and Ian Sykes. The gist is that the volatility in stock markets makes it hard for you to be able to plan for the long term. They recommend inflation linked bonds that guarantee to beat inflation by 1 or 2%, providing a total return of around 6% tax free. You might under perform a stock market investment in the long run, but at least you can plan in advance and know exactly how much money you need to put away to achieve your long term goals because the returns are guaranteed.
Another twist on this, suggested by Nassim Taleb is to put 90% of your savings in the safest possible place (Inflation linked bonds fit the bill for me) and the remaining 10% in something highly speculative.
For me, trading fits the bill here for the remaining 10%, although its high risk, there is potential for high gain.
How much can you make from trading?
So what can we do with our trading pot? One questioned that often gets asked is “How much can I make trading forex / spread betting”. Unfortunately that’s almost impossible to answer because it depends on the available capital you have to put in and your ability to trade (and the health of your personal finances).
The one thing I would say is to make your initial expectations realistic when you first start trading. Not everyone is going to be able to make it straight away. I know we all dream of making our fortune from trading, but perhaps only one in a few hundred mange to get it right straight away. The first phase is all about what Dr Brett Stennbarger calls “surviving your learning curve”. Larry Williams hit the headlines by turning $10,000 into $1,000,000 in one year in a trading competition. He then taught his daughter his techniques and she won the same competition a few years later. That’s an extreme example and not everyone is going to be able to follow it. Charles Kirk of the excellent www.kirkreport.com used to put his performance online and his returns are perhaps more reasonable. During the peak of the dot com bubble his returns were in the 300-500% level annually, which is a highly impressive achievement. In more recent times it has been around 100%.
I prefer to set goals with my trading profits, with milestones along the way: Here’s my trading goals.
– Make a profit.
– Beat your bank account interest rate over a year
– Beat the FTSE over a year.
– Make a 25% profit.
– Make a 50% profit.
– Make a 100% profit.
Other goals might include:
– Pay my tax bill with your trading earnings.
– Buy something with your trading profits.
– Earn a quarter/ half/ three quarters/ all of your existing
salary from trading profits.
I hope all this helps with your trading during these turbulent times.
My trades
Good trade on the FTSE yesterday using the ORB method, but just feeling my way back in at the moment. Kicking myself for being away from my screens with the rally last Monday. Everything about it seemed to be a rally driven by 26 year old testosteroned brokers pumping their commissions quotas up. The bail out didn’t solve any of the underlying problems. I made a mental trade that I’d short the close last Monday. Mentally I’m quids in, in reality I’m kicking myself for missing out. Still I stuck to my rules of never trading when I don’t feel fully prepared, and that is especially true when I’m on holiday with just CNBC and my brokers’ number to help me out.
I’m looking for a long entry on the ES (S&P 500 futures but haven’t seen it yet. These big drops twitch my contrarian instincts, but certainly won’t be putting a trade on a head of the Fed decision this evening.
I’ve been finding the following resources invaluable of late, especially in the last two days. I highly recommend the following for their independent commentary:
http://bigpicture.typepad.com/
http://www.kirkreport.com/ (small donation for members area)
http://www.sentimentrader.com/ (around £15 per month)
This week’s top trading buttons
Wow, what a week we’ve had and there’s more to come. Without doubt, the biggest ticket is today’s FOMC interest rate decision. It could be the biggest meeting in the Fed’s history. The announcement is due at 19.15 this evening, so watch out, there could be fireworks or further selling if the street likes/ dislikes the announcement. Rumours abound that another rate cut is coming. A cynic might say that Wall Street is forcing the Fed’s hand by selling off into the meeting. We’ll soon find out this evening. Tomorrow we’ve got the minutes from the last meeting of the MPC. Just how close are they to cutting rates? Almost impossible decision for them with inflation above expectations but credit markets screaming for a cut.
Hold on to your hats folks, the week’s rocky ride isn’t over yet.
Trading wisdom
“Selling does not make a market bottom; buying does.” Paul Desmond
